Zero emission vehicles (ZEV) mandates

What are ZEV mandates?

There are several policy tools to reduce greenhouse gas (GHG) emissions in the transportation sector. Zero-emission vehicles (ZEVs), such as battery electric vehicles (BEVs) and fuel cell vehicles (FCVs), can reduce GHG emissions and local air pollution. ZEVs already generally reduce emissions compared to internal combustion engine vehicles. Importantly, ZEVs can also further and significantly reduce their lifecycle emissions as electricity generation – particularly at the margins – continues to decarbonize. This will yield far greater emissions benefits than could be delivered by even the most efficient internal combustion vehicles, which have inherent efficiency limits.

A ZEV mandate is a deployment-focused policy that requires vehicle manufacturers to produce an increased number of ZEVs by a specific date. The mandated target usually rises over time. These policies can apply to light-duty passenger vehicles and/or medium- and heavy-duty vehicles, like trucks. The policy can also require that the vehicles be “offered for sale” or “placed in service” (when the vehicle is sold), rather than only produced, to ensure they are being deployed. The policy can push automakers to research, develop, market, and invest in zero-emitting vehicle technologies, such as batteries, which will lower ZEV costs and create new model options for consumers.

How do ZEV mandates work?

There are generally two approaches to ZEV mandates. First, under a percentage credit requirement, policymakers can require manufacturers to obtain a specific number of ZEV credits in a defined time period. The credits can be generated when a manufacturer produces an eligible light-, medium- or heavy-duty vehicle, produces and delivers for sale an eligible vehicle, or places an eligible vehicle in service. Vehicles can be awarded different numbers of credits based on their environmental characteristics—thereby incentivizing higher environmentally-performing vehicles. For example, a fully electric vehicle with a long range could be awarded more credits than a plug-in hybrid electric vehicle. The mandate can require manufacturers to obtain a specific number of credits based on a percentage of their total manufacturing output. For example, if a manufacturer sells 10,000 vehicles and is required to have credits equal to 10% of its total sales, the manufacturer would need to generate 1,000 credits. The way a manufacturer meets this credit requirement is up to their discretion. For example, if it is cheaper for an automaker to produce only the highest-performing vehicles, which generate the most credits, they could meet the credit requirement with fewer vehicles produced compared to meeting the requirement with a mixture of higher-credit- and lower-credit-earning vehicles.

Second, policymakers could use a market-share based system that requires ZEVs to make up a specific percentage of new vehicles produced, delivered for sale, or placed in service. For example, a manufacturer could be required to have ZEVs make up 10 percent of total production in a given year. So, if an automaker produces 10,000 vehicles of an eligible class in 2021, 1,000 of those vehicles would be required to be ZEVs. Similar to the first system, vehicles can be awarded full or partial credit towards the mandated market-share percentage. Therefore, in this example, a BEV or FCV could count as 1 full vehicle towards the 1,000-car requirement whereas a plug-in hybrid-electric vehicle (PHEV) could receive 0.5 credits. In this system, assuming no other restrictions, a manufacturer would need to produce 2,000 PHEVs to meet the 10 percent, or 1,000 vehicle, market-share requirement.

There are tradeoffs based on how a ZEV mandate is designed. For example, a mandate with a percentage credit requirement that awards credits to vehicles based on their environmental performance can provide compliance flexibility that reduces costs for manufacturers and incentivizes innovation. However, the overall mix of ZEV and hybrid vehicles that will be produced under this design is uncertain. This is because automakers could choose to meet the credit requirement with any combination of low-credit generating (hybrid) or high-credit generating (ZEV) vehicles, making the number of ZEV vehicles produced dependent on private automaker decision-making.

On the other hand, if a market-share based system requires a certain percentage of new vehicles produced to be ZEVs and does not allow partial crediting, there would be more certainty as to how many eligible vehicles would be produced. If a manufacturer’s sales are known or can be estimated, and each eligible vehicle counts the same towards the total required vehicles, the regulator will know how many zero-emitting vehicles will be produced based on the market-share percentage requirement they set. However, this approach is less flexible for manufacturers and could also increase costs and reduce innovation by mandating the production of a small number of vehicles with specific characteristics, rather than rewarding manufacturers for producing a range of vehicles.

The effectiveness of the mandate is less dependent on whether it is based on a percentage credit requirement or a market-share requirement and more dependent on the design features of the individual program. For example, a market-share requirement that allows for partial crediting of some vehicles or a credit-based program that limits eligibility to pure ZEVs would blend features of both approaches.

The number of ZEVs manufacturers are required to produce can be based on a percentage of the manufacturer’s total vehicle sales in a specific jurisdiction. The mandated percentage can increase over time to incentivize innovation in zero-emission vehicle technology and growth in ZEVs’ market share. Automakers can be given additional compliance flexibility by being able to produce and bank surplus credits for future use or trading with underperforming competitors.

The number of ZEVs manufacturers are required to produce can be based on a percentage of the manufacturer’s total vehicle sales in a specific jurisdiction. The mandated percentage can increase over time to incentivize innovation in zero-emission vehicle technology and growth in ZEVs’ market share. Automakers can be given additional compliance flexibility by being able to produce and bank surplus credits for future use or trading with underperforming competitors.

Key Design Considerations

Will the mandate be a credit-based or market-share based system? What are the program goals, i.e., GHG emissions reduction, local air pollution reduction, total ZEV sales, incentivizing innovation or greater deployment?

Which vehicles are eligible under the mandate? Will the mandate cover medium- and heavy-duty vehicles, or just passenger cars? How will credits for different vehicles be awarded? Will some vehicles receive partial credit?

How should manufacturers’ credit or quota requirements be determined (e.g., average sales from the last three years)? How should manufacturers’ requirements differ based on their size? Will the requirements increase over time? Will compliance flexibility mechanisms such as trading and banking credits be allowed under the program? How will non-compliance be penalized?

How can the design of ZEV mandates complement other policies like tax incentives or fuel economy standards and ensure these policies don’t work at cross-purposes?

U.S. experience

California introduced its ZEV mandate for light-duty vehicles, also known as the ZEV regulation, in 1990 and has reformed it several times over the last two decades.[1] Eleven additional states have adopted the California ZEV regulation and other states are actively considering the policy. The California Air Resources Board sets the ZEV standards for all participating states and manages the program for California. As part of California’s Advanced Clean Cars program, the state created the ZEV mandate for model years 2018 to 2025.

The program establishes a rising ZEV percentage credit that is based on a manufacturer’s production volume—the manufacturer’s annual average sales in a state. For example, in 2022, manufacturers regulated under the program must have credits equal to 22% of their production volume. The mandate classifies manufacturers into three groups: “small-volume”, “intermediate-volume”, and “large volume”. Small-volume manufacturers are exempt. Intermediate-volume manufacturers must meet the rising percentage credit requirement. Large-volume manufacturers must meet the rising percentage credit requirement and an additional minimum credit requirement for “pure”[2] ZEVs. The minimum pure ZEV requirement ensures that large-volume manufacturers meet a portion of their credit requirements with pure ZEVs rather than meeting their requirements with only transitional ZEVs, which are non-pure ZEVs that meet certain low-pollution criteria and have a zero-emission travel range. The most common example are plug-in hybrid electric vehicles.

California’s ZEV mandate was originally a market-share based program that did not allow partial crediting for vehicles that were not pure ZEVs. However, due to slow technological progress on batteries, low demand from consumers, and high costs to produce pure ZEVs, California switched to a crediting system that rewarded partial credits to gas-powered vehicles with low emissions and some electric components. The California Air Resources Board has argued that the development of hybrid electric vehicles, which were rewarded under the crediting system, was crucial to later breakthroughs in pure ZEV technology.

The program awards credits for pure ZEVS (BEVs, FCEVs), transitional ZEVS, and a few other niche technologies. Credits are allocated based on the vehicle’s all-electric range, with longer ranges receiving additional credits. Pure ZEVs are awarded more credits than transitional ZEVs. Manufacturers are allowed to bank, trade, and sell credits. If an automaker fails to comply, there is a $5,000 penalty for each ZEV credit deficit. California also allows manufacturers that outperform state vehicle GHG standards to offset some of their ZEV credit requirements.

The California Air Resources Board predicts the program will lead to ZEVs and plug-in hybrids making up 8 percent of new vehicle sales in California in 2025. The mandate has been credited with facilitating most of the innovation in and demand for electric vehicle batteries over the last decade and driving vehicle electrification in California and the United States. In 2018, electric vehicle sales as a percentage of total sales in the US was 2.1 percent. In California, it was 7.9 percent. The program has also increased employment and investment in the state.

In June 2020, the California Air Resources Board approved the Advanced Clean Trucks (ACT) Regulation. While the existing ZEV mandate only applies to light-duty vehicles, the new rule is the world’s first zero-emission commercial truck mandate. Starting in 2024, the rule will require automakers to have zero-emission trucks make up a rising percentage of their new medium-and heavy-duty vehicle sales in California. The state aims to have a 100% zero-emission truck fleet by 2045.

Additional Resources

[1] Under the federal Clean Air Act, California has long been granted waivers to set more stringent regulations on vehicle pollution compared to the federal government. However, the Trump Administration revoked the waiver with respect to GHG emissions in 2019. California and 22 other states are currently suing the U.S. EPA to block this move.

[2] The California ZEV defines “pure ZEVs” as vehicles that produce zero exhaust emissions of any criteria pollutant (or precursor pollutant) under any and all possible operational modes and conditions. Only fully electric and fuel cell vehicles meet these criteria (RFF, 2019).

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